The pound has gained as speculation about a possible U-turn on the mini-budget has increased.
On Friday morning, sterling was trading above $1.13 versus the dollar as the chancellor returned home early from the United States for urgent discussions in Downing Street.
In September, the currency touched a record low of $1.03 as markets responded negatively to Kwasi Kwarteng’s mini-budget.
In it he promised billions of pounds of tax cuts but did not explain how he would fund them.
Government borrowing costs have also fallen, after surging to worrying levels in the days after the mini-budget.
The Bank of England has been buying government bonds – known as gilts – to try to stabilise their price and prevent a sell-off that could put some pension funds at risk of collapse.
However, that support is due to come to an end on Friday.
There has been speculation it may be extended, although this was dismissed by the Bank’s governor, Andrew Bailey, earlier this week.
The government has already U-turned on its plan to scrap the top rate of income tax, but many Conservative MPs think a further change of plan is imminent.
Russ Mould, investment director at AJ Bell, said the financial markets were already pricing in a government U-turn.
“They started to [price it in] yesterday,” he told the BBC’s Today programme.
Mr Mould pointed to the fact that the yields – or the effective interest rate – on UK government bonds have been falling back in anticipation of a reversal to the tax-cutting plans. On Friday morning, the yield on bonds that borrow money over 30 years fell to 4.47%.
“Gilt yields came down… and sterling rose against the dollar to $1.13 and against the euro to €1.16, so I think they are starting to either expect, demand, sniff out that there will be some degree of U-turn possibly on corporation tax, dividend tax, other areas,” Mr Mould said.
Asked what would happen if there is no U-turn, Mr Mould said: “You would expect the gains that we’ve started to see, to unwind.”
Bank of England support
The government raises the money it needs for spending by selling bonds – a form of debt that is paid back plus interest in anywhere between five and 30 years.
Pension funds invest in bonds because they provide a low but usually reliable return over a long period of time.
However, the sharp fall in their value after the mini-budget forced pension funds to sell bonds, threatening to create a “downward spiral” in their prices as more were offloaded, which left some funds close to collapse.
This sparked an emergency intervention by the Bank of England, which stepped in to buy bonds and prevent their price falling further.
There has been strong speculation that the Bank will extend the scheme, which is due to end on Friday.
But on Tuesday, Mr Bailey dashed those hopes, telling pension funds: “You’ve got three days left now and you’ve got to sort it out.”
Bethany Payne, global bonds fund manager at Janus Henderson, told the BBC it was not clear whether pension funds have done enough to strengthen their finances.
“The risk is that we don’t know how pension funds have used this window of time and whether they have used it effectively by raising cash and doing everything they need to,” she said.
“So the true test of the market will be this afternoon and Monday morning to see whether they have done enough.”